Executive Pay and Reciprocally Interlocking Boards of Directors


Is executive compensation influenced by the composition of the Board of Directors? About one in
ten Chief Executive Officers (CEOs) is "reciprocally interlocked" with another CEO -- a current or
retired CEO of firm A serves as a director of firm B and a current or retired CEO of firm B serves as
a director of firm A. An even larger fraction (20%) of firms have at least one current or retired
employee sitting on the board of another firm and vice versa, which is larger than would be expected if
directors were randomly assigned to board positions. I investigate how these and other features of board
composition affect CEO pay. I use a newly assembled sample of nearly 10,000 director positions in
America’s largest companies, collected from annual reports, together with information on firm value,
recent stock returns, and other determinants of CEO salary. Chief executives heading interlocked firms
earn significantly higher compensation. After controlling for firm and CEO characteristics, however,
interlocking directorates are associated with at most 10% higher pay. Furthermore, there is some
evidence that this return is getting smaller over time.

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The Journal of Financial and Quantitative Analysis, Vol. 32, No. 3, September, 1997
Working Papers